REIT selling area Hersha hotels, bolstering local support

When the ink dries this winter, Hersha Hospitality Trust will be out of the hotel business in Central Pennsylvania.

Sort of.

The real estate investment trust announced plans last month to divest itself of 16 remaining noncore hotels — including four it had left in Cumberland and Dauphin counties — to give it more flexibility to invest in major market projects.

On the flip side, its affiliated management company, Hersha Hospitality Management, retains six properties in the Business Journal's coverage area.

HHM continues to diversify through partnerships with large investment groups, which is growing hotel staff and support personnel at its centralized offices in Harrisburg, Philadelphia and New York City.

The latter is filling up Hersha's primary office in Harrisburg, which led to recent renovations and plans for more during the next five years.

"This is home. We grew up here. We have no reason to move elsewhere," said Jay Shah, CEO of Hersha Hospitality Trust. "The real estate business is decentralized. These are nonportable assets. Because of that, we can have our headquarters wherever."

The Hersha businesses now have 165 people in the Harrisburg office — more than half tied to the management company.

Trust transformation

The $217 million trust sale will complete a portfolio transformation that accelerated about five years ago to focus solely on select-service hotels in urban gateway markets with high barriers to entry.

"It gives us a better ability to rebound more steeply," Shah said of the pure-play strategy in the event of another economic downturn.

At the close of the deal, which is expected by the end of the first quarter 2014, Hersha will have sold off 46 nonstrategic hotels since 2008. That will have generated about $460 million in gross proceeds.

During that same span, the trust has acquired about $1.2 billion in hotel assets in its key markets — Boston, Los Angeles, Miami, New York City, Philadelphia, San Diego and Washington, D.C.

These assets are in areas with higher room demand and pricing, where supply growth is limited, construction schedules are lengthy and capital needs are robust.

The latest deal not only further reduces leverage, it is expected to generate net proceeds of about $138 million, according to company records. That cash can then be redeployed into higher growth opportunities in Miami and the West Coast, said Mike Gillespie, the trust's chief accounting officer.

California and Florida are fairly new markets for Hersha, which has focused largely on the Northeast, especially New York City and Philadelphia. Other market possibilities could include San Francisco and Portland, maybe Seattle, Shah said.

Smaller circle, larger impact

Like the trust, HHM has narrowed its focus somewhat. But instead of geographic expertise, HHM has steadily grown by working with a select group of large asset managers with sizable hospitality portfolios.

That list includes BlackRock Financial and Starwood Capital Group. The latest trust sale is with an affiliate of the Blackstone Group LP, the largest real estate private equity firm in the world.

HHM will retain management in most cases.

"We have diversified to the benefit of the region," said Naveen Kakarla, HHM's president and CEO. "We are working with more stable owners that will hopefully grow HHM as a platform."

As the trust and other partners expand their hotel portfolios, HHM continues to add support personnel in Harrisburg.

"We have found that we had a real opportunity to create an operating company of national scale with full service and independent capabilities," Kakarla said.

A key piece of that national growth is HHM's partnership with Starwood, which began in 2010. Starwood bought a nearly 50 percent stake in the company, which boosted HHM's exposure coast-to-coast and reduced operating costs for the former.

Aggressive investments in core markets by the trust during the downturn also has helped set the stage when the real estate cycle started back on the upswing.

"Our energy is around building capabilities that are important to the growth of our partners, as opposed to marketing what we have," Kakarla said,

Yes, HHM has an advantage over other operators because it knows more about what its investment partners are planning before anyone else. It can tailor its business plan accordingly.

"It might seem like we don't have to do a lot of business development, but every month each hotel's business numbers are important to us," he said. "We have to do well in order to sustain growth potential."

Standing alone

At the time they were created, the various Hersha businesses relied heavily on the success of the others.

That is still largely true.

"We have a very meaningful portion of our revenue generated by HT," Kakarla said. "We are very aligned with their needs and growth potential and plans."

But HHM — much like the affiliated Hersha Purchasing & Design, which provides hotel supply management and interior design services — is standing more on its own today as the management portfolio shifts and spreads out to other large investors.

About half of HPD's business is now for outside clients, said Vince Coppola, the firm's president. The company finished 2012 with $36 million in revenue, according to Business Journal records.

"I would love to believe we are insulated from one group or another," Kakarla added. "But that's not how we think about it. I see our different partners investing in different types of projects."

That ongoing diversification with owners who are hard to build relationships with should yield great rewards moving forward, he said.

Growing presence in Harrisburg

Since March, the Hersha businesses collectively spent about $750,000 on renovations of the four-story Harrisburg office shared by the affiliated companies.

The 14,750-square-foot third floor of the building was completely renovated to include 24 single and shared offices and 67 workstations, along with a board room, a smaller meeting space and kitchen area. The second phase involved upgrades to existing space on the second floor, including a new kitchen area, file room, collaborative area and modified offices. A first-floor cafeteria also was expanded and renovated.

Hersha is planning first-floor office renovations and a fit-out of the fourth floor. The latter, which already has undergone some structural work, will mimic the third floor. However, the fourth floor won't be done until current spaces are occupied, said Mike Gillespie, the trust's chief accounting officer.

The recent interior projects should accommodate Hersha's growth for the next five years, he said. It expects to lease some office space in the interim.

Hersha has not budgeted the cost of the remaining projects.

In total, the Harrisburg office has 165 employees. Of that, 85 are HHM employees. It is Hersha's largest office, housing everything from accounting and finance to information technology and supply management and design services.

Hersha also has offices in Philadelphia and New York City.

More about Hersha Hospitality Management

Start and growth: Hersha Hospitality Management was born out of the REIT structure to operate the trust's hotels. Today the management company has 117 hotels in 20 states, said Naveen Kakarla, the company's president and CEO.

Partners: In addition to trust properties, HHM manages 50 properties for Starwood Capital Group. It also works with BlackRock Financial, Lubert-Adler Partners, The Moinian Group, Campus Apartments and Mast Capital.

Diversity: Unlike the trust, which focuses primarily on select-service properties, HHM has a range of properties. That includes more than 30 extended-stay hotels, 20 full-service properties and 25 independents.

• Rank: HHM ranked No. 9 on the list of U.S. hotel management operators, ranked by number of guest rooms, according to Hotel Management magazine.

• Revenue: $23.1 million in 2012, according to Business Journal records. That was up from $17.5 million in 2011 and $13.2 million in 2010.

• Staff: Nearly 5,000 employees across the U.S. and 330 in Central Pennsylvania hotels.

More about Hersha Hospitality Trust

Start:The Hersha Group started with a single hotel in 1984. By 1998, company Chairman Hasu Shah and his partners had built a portfolio of about 10 hotels.

IPO: To raise capital and grow the hospitality business, the Harrisburg-based company created Hersha Hospitality Trust, a real estate investment trust. Its initial public offering was in January 1999. The IPO raised about $13.7 million. Since then, the trust has raised more than $1.2 billion in the public equity markets, said Mike Gillespie, the company’s chief accounting officer.

Asset growth: More than $1.8 billion as of June 30. In January 1999, total assets were $44.2 million. With the pending sale of 16 noncore hotels, total assets will decrease by about $47 million, or 3 percent, since a portion of the cash proceeds will be used to pay down existing debt, Gillespie said. The remaining cash from the sale will be redeployed into opportunities in higher growth markets, such as Miami and the West Coast.

Age: Hersha Hospitality Trust will have 48 hotels after the sale to an affiliate of New York-based Blackstone Group LP. The presale average age of Hersha’s portfolio is 8.5 years. After the sale, the average age will be 8.2 years. The trust is focused on about seven core markets: Boston, Los Angeles, Miami, New York City, Philadelphia, San Diego and Washington, D.C.

Staff: The trust has 45 full-time employees, according to Business Journal records.

Revenue: In 2002, Hersha revenue was $14.4 million, according to Business Journal records. It was $358.2 million in 2012.

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Jason Scott

Jason Scott covers state government, real estate and construction, media and marketing, and Dauphin County. Have a tip or question for him? Email him at jasons@cpbj.com. Follow him on Twitter, @JScottJournal.
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